Self-Employed to Face Mortgage Application Difficulties Post-Pandemic
Written on 12 April 2021
The self-employed have always found it harder to get mortgages than their employed counterparts. This is often a result of the contrasting complexity in proving your earnings as a self-employed person. Whilst employees can simply provide their payslips and a P60, the self-employed are left relying on a myriad of documents to evidence their income - such as SA302s, tax calculations, company accounts, business bank statements and contracts. Each document is a puzzle piece that helps make up a full and complete picture of one’s income, which - given that there is no uniformly acceptable “proof” for a lender - means that one document or piece of information can drastically alter borrowing capacity and the likelihood of being granted a mortgage for better or worse.
Savvy self-employed people who employ an accountant to utilise as many tax allowances as possible to minimise their tax liabilities face an additional challenge in that the methods deployed by their accountant may reduce their earnings on paper. Lenders can only work with what can be evidenced, which can lead to lower than expected maximum loan sizes.
The difficulties already faced by self-employed applicants run the risk of being somewhat magnified in a post-pandemic landscape. Here’s how.
Government Grants Could Work Against Applicants
The pandemic has been hard on many of us so, to help, the Government made various grants and allowances available to many – but not all - self-employed workers and to employers with the furlough schemes. The various grants and bounce back loans were taken up by thousands of eligible candidates, many of whom did not know what the proceeding 12 months would have in store for them with full lockdowns and partial lockdowns that curtailed their work.
Lenders are having to deal with many applicants who have declared they took the financial assistance in case things were to take a nasty downwards turn. Underwriters have had to draw up new policies and procedures to enable them to process such applications. The real problem is that the principle of responsible lending comes into play for anyone who took such assistance as, by virtue of taking government money, the applicant is saying: “I think I might be in financial trouble so I took the funds” and underwriting protocol would react with: “in which case maybe we shouldn’t lend you more money as that wouldn’t be responsible”.
Turnover During the Pandemic Will Be Lower for Many Self-Employed Workers
Currently many lenders are requesting 3 months of business bank statements to check that the business is trading as a going concern and able to provide the level of personal income required to support the mortgage. This is a positive for many and indicates that lenders are trying to assist responsibly.
However, this is - to a large extent - an unsustainable fix to lenders' underwriting policies.
When calculating a self-employed person's income, the vast majority of lenders average the last 2 years of income from company accounts or tax returns to come to a figure to use for earnings in their affordability calculations, which is subsequently used to ascertain the maximum loan size.
As we come out of what we all hope is the final lockdown, and the end of the 2020/2021 tax year, it is clear that many self-employed people will be declaring reduced turnover and profitability between April 2020 and April 2021. This means that their personal earnings (or net profits or dividends) will likely be lower than they were for 2019/20.
2 problems face lenders and borrowers once these latest, reduced set of figures become available to lenders:
- Firstly, the average income of the borrower will have reduced as a result of a poor COVID-19 trading period which will reduce the amount that self-employed people impacted by the pandemic can borrow
- Secondly, the fact that the most recent year’s income is below the previous year will result in lenders automatically declining applications or even investigating whether or not the business is capable of recovering to pre-pandemic levels of turnover and profitability. This assessment is a huge challenge for lenders
Automated Underwriting Process Could Result in Application Declines
Mainstream lenders are heavily driven by their systems and not human underwriters. If a case ticks all the computer algorithm boxes it is a slick, quick process towards releasing the mortgage offer. These lenders have worked hard over the years to reduce human input to as little as possible to process as many cases as possible as cheaply as possible. What they will not want to be doing is taking out a succession of self-employed applications to manually investigate and assess the effect of the 2020/21 reduction in earnings. We fear they will simply decline the applications due to the reduced income.
It is at this point that the less mainstream - or specialist - lenders could step up. They are used to dealing with applications from customers with complex situations. They are slower at processing because they use a qualified and experienced underwriter to look at the bigger picture, to seek answers to questions to clarify the actual situation and then make a decision. We believe that in 2022 and 2023 these lenders will be there to assist many self-employed applicants to still access appropriate loan sizes at the expense of mainstream lenders.
What Should You Do if You Find Yourself in This Situation?
HMRC has deadlines to submit tax returns and for 2020/21 that will be 30th January 2022. So, the most recent 2 years are still 2019/20 and 2018/19. Lenders will have to work from these for now. They will likely also ask for up to 3 months business bank statements since these will show what kind of state the business is currently in. Therefore, if you think you might need a mortgage in the coming few years and will therefore have a low income pandemic year included in the lender’s assessment and affordability calculations, you might want to think about obtaining that mortgage a lot sooner.
An independent, whole of market intermediary with access to both mainstream and specialist lenders will help you understand your options so you can make a decision as to what is best for you, your current circumstances and your future needs. Call us on 0330 433 2927 to speak to an expert.